It's been a great afternoon session for Deere & Company investors, who saw their shares rise 1.1% to a price of $364.12 per share. At these higher prices, is the company still fairly valued? If you are thinking about investing, make sure to check the company's fundamentals before making a decision.
A Very Low P/E Ratio but Trades Above Its Graham Number:
Deere & Company manufactures and distributes various equipment worldwide. The company belongs to the Industrials sector, which has an average price to earnings (P/E) ratio of 20.49 and an average price to book (P/B) ratio of 3.78. In contrast, Deere & Company has a trailing 12 month P/E ratio of 10.5 and a P/B ratio of 4.77.
When we divide Deere & Company's P/E ratio by its expected EPS growth rate of the next five years, we obtain its PEG ratio of -2.95. Since it's negative, the company has negative growth expectations, and most investors will probably avoid the stock unless it has an exceptionally low P/E and P/B ratio.
Growing Revenues With Increasing Reinvestment in the Business:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $37,358 | $39,258 | $35,540 | $44,024 | $52,577 | $61,376 |
| Gross Margins | 11% | 10% | 11% | 17% | 17% | 21% |
| Operating Margins | 12% | 11% | 12% | 18% | 18% | 21% |
| Net Margins | 6% | 8% | 8% | 14% | 14% | 16% |
| Net Income (MM) | $2,371 | $3,257 | $2,753 | $5,965 | $7,133 | $10,046 |
| Net Interest Expense (MM) | $1,204 | $1,466 | $1,279 | $1,041 | $1,101 | $2,021 |
| Depreciation & Amort. (MM) | $1,927 | $2,019 | $2,118 | $2,050 | $1,895 | $1,979 |
| Earnings Per Share | $7.24 | $10.15 | $8.69 | $18.99 | $23.28 | $33.79 |
| Diluted Shares (MM) | 327 | 321 | 317 | 314 | 306 | 271 |
| Free Cash Flow (MM) | $837 | $2,292 | $6,663 | $6,829 | $3,502 | $5,752 |
| Capital Expenditures (MM) | $985 | $1,120 | $820 | $897 | $1,197 | $1,425 |
| Net Current Assets (MM) | -$45,523 | -$45,894 | -$50,748 | -$51,930 | -$51,653 | -$58,984 |
| Long Term Debt (MM) | $58,047 | $61,102 | $61,727 | $63,799 | $66,761 | $77,424 |
| Net Debt / EBITDA | 8.44 | 8.88 | 9.83 | 6.62 | 6.53 | 5.9 |
Deere & Company has growing revenues and increasing reinvestment in the business, exceptional EPS growth, and generally positive cash flows. However, the firm suffers from slimmer gross margins than its peers and a highly leveraged balance sheet. Finally, we note that Deere & Company has average net margins with a positive growth rate.
